Back to Zopa Blog

Five ways the 2016 Budget will affect your personal finances

While many experts had expected this year’s Budget to deliver more changes to the UK’s pension system, in the end it was ISAs that got the biggest makeover from the Chancellor.

George Osborne revealed in the run-up to his speech that he was no longer considering a limit on the tax relief applied by the government to pension contributions. So the big question was whether the Budget would in fact contain any significant surprises.

In the event, there was no last-minute rabbit from the hat – but there were a large number of less dramatic policy changes announced.

ISA shake-up

Savers, investors and peer-to-peer lenders will benefit from a steep increase in the ISA limit, which comes into effect from April 2017. At present, the annual ceiling is £15,240 but that will rise to £20,000 next year.

For a Zopa customer who earns 4.5% a year by lending their maximum allowance through an Innovative Finance ISA (coming soon) this could mean an annual tax saving of at least £180 (higher-rate taxpayers would be £360 better off), though it is important to remember that with peer-to-peer lending your capital is at risk.

Next April will also see the introduction of the Lifetime ISA, aimed at the under-40s. This will function a bit like a pension, in that any contributions (up to a £4,000 annual limit) will be given a 25% government top-up.

The money can later be withdrawn, tax-free, either to buy a first home or to pay for retirement.

Higher personal allowances

There were further steps to increase the amount workers can earn free of income tax. Next month, the personal allowance is due to rise to £11,000, and Osborne said this would go up to £11,500 in 2017.

There will also be a sharp increase in the higher-rate threshold next year, when the 40% rate will kick in only when earnings exceed £45,000 – currently, the cut-off is £42,385.

Capital-gains tax cut

Tax on investment profits is due to be slashed from next month. Basic-rate taxpayers will see their capital-gains tax rate fall to 10% from its current 18%, while for higher-rate taxpayers, the rate will be 20% instead of 28%. The cut won’t apply to residential property, however.

Sharing economy allowances

In recognition of the higher numbers of people using sharing economy services such as Airbnb, the Chancellor is to introduce a £1,000 tax-free allowance for gains made via accommodation-rental sites. The same tax exemption will apply to profits made trading on the likes of Amazon Marketplace and eBay, as well as revenues from ride-sharing services, for example.

Duty freezes

Duty on beer, cider, whisky and other spirits is being frozen this year, although there will be higher rates on wine and tobacco. Motorists will be pleased that the fuel duty freeze is set to continue for another year, especially given reports ahead of the Budget that the rate was set to increase.

Car insurance prices are set to rise, however, thanks to another increase in insurance premium tax – it will go up to 10% from October, following a rise from 6% to 9.5% last year. This tax hike will also affect the cost of home cover.